Californian jam and pension scheme investments

In 2000, the result of an experiment designed to examine consumers’ reaction to choice was published in the Journal of Personality and Social Psychology. The experiment was conducted in a Californian grocery store, where researchers set up a sampling table with a display of jams. On the first weekend, they set out 24 different jams for people to taste; and on the next, they set out just six.

The results were staggering. Whilst more shoppers stopped at the display when there were 24 jams, only 3% of those who stopped went on to buy a pot. When there were six jams on display fewer shoppers stopped, but 30% of those who tried a jam made a purchase. Similar results have been found in other experiments since.

It seems that too much choice can be demotivating and the same effect can be seen in the investment industry.

In Europe there are more than 3,000 asset managers delivering a plethora of investment funds across a range of asset classes, with varying performance objectives. Trustees of pension schemes, as well as members participating in defined contribution (DC) schemes, have too many jams on the table.

The temptation for investors faced with too much choice is to disengage from a process which feels overly complex. How can a sensible selection be made from such a vast array of options without committing time and resource that many individuals or trustee boards simply do not have?

The answer is to be really clear about setting specific objectives and to measure each available option against its ability to achieve those objectives.

Comparing investment options against inconsistent market related benchmarks is akin to the shopper in the grocery store trying to decide which of 24 jams of different sizes, costs, flavours, prices and sugar content to buy – except that investors have several thousand to choose from and the differentiators are far more complex. Unless one is clear as to what they are trying to achieve, making a good decision when faced with a lot of choice is nigh on impossible.

It is also much more straightforward to measure success once you have a clear idea of where you are trying to get to. Rather than looking at performance relative to peers or a market index, schemes should be measuring investment performance against their own scheme specific objectives: Has the funding level improved in line with expectation? Have costs remained within stated boundaries? Have the assets designed to reduce risk moved in line with liabilities?

It is crucial that the investment consultancy community puts the investor at the center of our benchmarking process. The outcomes that each specific investor is trying to achieve should be set as our measure of performance. Once we do this, then we enable our clients to isolate the asset classes or funds most likely to achieve those objectives from the often overwhelming choices available to them.